Drax Regulatory News (DRX)

Drax Pumped Storage Limited pays £6.12 million for breaching Generation Licence 

· Energy generator, Drax Pumped Storage Limited, has admitted to an inadvertent breach of its Electricity Generation Licence after securing excessive Balancing Mechanism (BM) payments from National Grid ESO in relation to Cruachan Power Station

· Drax Pumped Storage Limited has assured energy regulator, Ofgem, that it has revised the way it calculates its pricing, to prevent this from happening again  

· The generator has agreed to pay £6.12 million into a Voluntary Energy Redress Fund

Electricity generator, Drax Pumped Storage Limited (Drax), has today (Friday 13 January) agreed to pay £6.12 million into the Voluntary Energy Redress Fund, after it admitted to inadvertently breaching a condition of its Generation Licence. Drax secured excessive Balancing Mechanism (BM) payments from National Grid Electricity System Operator (NGESO), during periods of what is known as 'transmission constraint.' 

In order to meet our electricity needs, power generated from coal, gas, hydro, nuclear, wind, solar and other sources of energy has to get from where it is produced to where it is needed. If the system is unable to flow electricity in the way required, NGESO take actions in the market to increase and decrease the amount of electricity at different locations on the network, often referred to as 'transmission constraint management'. 

Situations which could cause transmission constraints might, for example, include where there is insufficient network capacity to transport power out of a particular area in which local generation exceeds demand. This can arise under normal network conditions on a given day. 

In this case, energy generator, Drax: 

· secured excessive payments between 1 January 2019 and 31 July 2022 by submitting excessively expensive bids to turn down its generation in the BM, and  

· as a result of Ofgem's compliance work, admitted to having inadvertently breached its Generation Licence, specifically the Transmission Constraint Licence Condition (TCLC). The TCLC prohibits generators from being paid, or seeking to be paid, an excessive amount by NGESO during times of transmission system constraint.  

Cathryn Scott, Director of Enforcement and Emerging Issues at Ofgem said:

"Protecting consumers is a priority for Ofgem, and we will continue to monitor the wholesale energy markets in Great Britain and ensure their integrity on behalf of energy users.  

"This enforcement action sends a strong signal to all generators that they cannot obtain or seek to obtain excessive benefits during transmission constraint periods. If they do, we have the powers to intervene and we are ready to use them." 

In the period since Ofgem raised the matter, Drax has fully cooperated with Ofgem. Drax has proactively sought to rectify the matter, including agreeing to make a payment to the redress fund and assuring Ofgem that it has implemented a new cost-based pricing methodology designed to reflect the costs and benefits to Drax of curtailing its generation. 

Ofgem has now closed this issue, and the £6.12 million will be paid into the Voluntary Energy Redress Fund, which will be driven directly into supporting vulnerable consumers with their energy, as well as invest in innovation projects and carbon emission reductions.

This is part of the compliance work undertaken by the Ofgem to ensure that the market is fair for everyone. Ofgem expects licensees to be fully aware of their legal obligations (including compliance with the TCLC) and have adequate procedures in place to prevent breaches from occurring.  

Notes to Editors: 

The Balancing Mechanism is operated by NGESO to ensure that the electricity transmission system is kept in balance at all times. Generators can submit offer prices to turn up generation, or bid prices to turn down generation, and are selected on a competitive basis by the NGESO according to the system need.  

Bid prices are the amount a generator is willing to pay (if positive) or be paid (if negative) by NGESO in the BM to turn down its generation when needed to help balance the transmission system. When turned down, the station can still sell power as if it were generating. During the period of the breach, Drax submitted excessively expensive bids to turn down its Cruachan Power Station in periods of transmission constraint.

TCLC is Condition 20A. Transmission Constraint Licence Condition of the Generation Licence.  

Generators located behind transmission constraints can have temporary market power during constraint periods because NGESO requires them to turn down in order to balance the system.  

A Transmission Constraint is defined in Condition 20A as any limit on the ability of the National Electricity Transmission System, or any part of it, to transmit the power supplied onto the National Electricity Transmission System to the location where the demand for that power is situated  

The Energy Redress Fund provides money to charities to deliver energy related projects that support energy consumers in vulnerable situations. It also helps to deliver benefits to consumers, who were negatively impacted by the specific issue that triggered the redress payment. For more information about Ofgem's Voluntary Redress Fund, see: Ofgem appoints Energy Saving Trust to distribute payments from rule-breaking energy companies to charities.